Disclosure Example: Extraordinary Assumption

Disclosure Example: Extraordinary AssumptionIn an appraisal assignment, an extraordinary assumption is employed to presume certain unknown information as fact. An extraordinary assumption is related to a specific assignment, and takes information that is unknown as of the effective date of the assignment results and assumes it to be true. If this assumption were found to be false, it could affect the appraiser’s opinions and conclusions.

Example scenario

Jim is appraising a single-family home for a mortgage refinance loan. When he inspects the property, he notes a crack in the foundation. He is unsure if this crack is structural or cosmetic, and he does not have the expertise to make this determination. In valuing the property, it may be appropriate for Jim to employ the extraordinary assumption that the home is structurally sound and does not need repair.

Taking this scenario even further, let’s say that the lender subsequently hires a structural engineer, who determines the home needs $50,000 of repairs to be made structurally sound. Jim’s extraordinary assumption is then be found to be false, rendering his value opinion invalid.

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Extraordinary assumption uses

Extraordinary assumptions can be used only for situations where information is unknown or uncertain. For example, if the borrower had handed Jim a copy of the engineer’s report at the time of the appraisal inspection stating the home is not structurally sound, this factor would not be unknown. If that were the case, Jim would have no basis for the extraordinary assumption that the home is structurally sound.

However, let’s continue with the scenario in which the structural engineer is not hired to inspect the foundation until after Jim has completed his appraisal assignment. Since the structural soundness of the home is unknown or uncertain as of the effective date of the assignment results, Jim can employ an extraordinary assumption. Of course, he must disclose the extraordinary assumption in his report.

USPAP disclosure requirements

No matter what type of written report is prepared (Appraisal Report or Restricted Appraisal Report), USPAP Standards Rule 2-2 requires that extraordinary assumptions must be clearly and conspicuously stated. Also, USPAP requires a statement that the use of the extraordinary assumption might have affected the assignment results.

There are no definitions for “clearly and conspicuously.” When making these disclosures, an appraiser must follow his or her conscience. A good rule of thumb is that the disclosure of an extraordinary assumption should be made everywhere in the report where the value conclusion appears. A disclosure buried on the last page of the appraisal report in 8-point type would probably not be considered clear and conspicuous.

Disclosure statement example

Continuing with the previous example, Jim finds he does not have enough room at the bottom of page 2 of the URAR form to fully disclose the extraordinary assumption. In this part of the form, he inserts, in bold type, “Please see attached addendum regarding the use of an extraordinary assumption.

Then, in the addendum, Jim’s report states:

This appraisal involves the use of an extraordinary assumption. Specifically, appraiser assumes the home is structurally sound, and that the crack in the foundation is cosmetic and not structural in nature. The use of this extraordinary assumption might have affected the assignment results.

Jim has complied with his disclosure requirements under USPAP.

Note that Jim may or may not have checked the “Subject to” box at the bottom of page 2 on the URAR form. USPAP does not instruct appraisers on how to fill out appraisal reporting forms. USPAP only requires Jim to ensure that his disclosure is clear and conspicuous.

Want more in-depth examples and helpful guidance related to appraisal disclosures? Enroll in our top-rated CE course: Essential Elements of Disclosures and Disclaimers.

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